In a guidance on the Sudan sanctions released back in April, the Office of Foreign Assets Control (“OFAC”) noted that the continuing sanctions on Sudan would prohibit U.S. oil companies

from providing services to the petroleum industry in the new state if those services would benefit the Government of Sudan or relate to the petroleum industry in Sudan, or from transporting exports of petroleum or petrochemical products through Sudan.

Revenue-sharing arrangements between Sudan and South Sudan arising from South Sudan’s use of Sudan’s pipeline would further complicate matters. Because of the inevitability of oil transport through Sudan and revenue-sharing arrangements between the two countries, this has been seen as, for all intents and purposes, a complete bar to U.S. oil companies doing business in South Sudan.

Apparently OFAC is now trying to find a way to work around that. Needless to say, because the sanctions on Sudan were imposed by Congressional legislation, OFAC doesn’t have a completely free hand here without enabling legislation from Congress. Still, OFAC is trying to determine what can be done in the absence of such legislation.

Princeton Lyman, the U.S. special representative to South Sudan, told a trade briefing in Washington, according to this item in Petroleum Economist, that a task force at OFAC was working on options to permit U.S. oil activity in South Sudan.

[Lyman] said the Treasury Department would define new criteria for licensing oil deals that would provide only incidental benefits to Sudan, making some deals with South Sudan possible. “The rules of the game are still being worked out and that is very frustrating to [South Sudan] because it wants US oil companies there,” he said. “There is a task force working on it and they will have something soon.”

I have to say I’m at a loss to see how anything could be structured that only provides “incidental” benefits to Sudan short of bypassing the Sudanese pipeline and any revenue sharing arrangement, both of which appear to be impossible, at least in the near term. But there is huge pressure on OFAC to structure something because the Chinese, which are major players in the oil industry in Sudan and South Sudan, are the only ones who will conceivably benefit if OFAC does not find a solution.

That being said, there was a major caveat pointed out by OFAC:

While the new state formed by Southern Sudan will no longer be directly subject to OFAC sanctions, certain activities by U.S. persons in the new state will continue to be prohibited by the SSR absent OFAC authorization given the interdependence between some sectors of the Southern Sudanese economy and infrastructure and those of the rest of present-day Sudan. The SSR will continue to prohibit U.S. persons from dealing in property and interests in property of the Government of Sudan, from performing services that benefit Sudan or the Government of Sudan, from engaging in transactions relating to the petroleum or petrochemical industry in Sudan, and from participating in exports to or imports from the new state that transit through Sudan, see 31 C.F.R. §§ 538.406, 538.210, and 538.417. … [S]hould a revenue-sharing arrangement between Sudan and the new state result in a situation where the government of the new state makes payments to the Government of Sudan from the sale of Southern Sudanese petroleum, U.S. persons generally could not engage in transactions involving the oil industry in the new state unless authorized by OFAC.

That last sentence is the tail that may swallow the snake. Right now, under the Comprehensive Peace Agreement, the South, which produces about 85 percent of the oil in Sudan, shares oil revenue 50-50 with the North. Upon independence, the land-locked state in Southern Sudan won’t be bound by the 50-50 split in the Comprehensive Peace Agreement, but it is now negotiating a post-independence revenue split, possibly as much as 30-70, to compensate for transiting its oil through facilities in the North. In that case, all activity by U.S. oil companies in the newly independent, and allegedly non-sanctioned, state in Southern Sudan will still require an OFAC license. The new guidance provides no guidance as to what OFAC’s policy will be for granting those licenses.

The current government in Khartoum was quick to make the most of these results and called for the U.S. to lift its sanctions on Sudan, noting that the U.S. had declared the peaceful conduct of the secession referendum as an important priority. The United States, however, declined this invitation noting its lingering concerns about continuing violence in Darfur. Other issues relative to the secession vote also remain to be resolved including the division of oil revenues between the two countries after independence and the ownership of the Abeyi region.

In the months of July and August 2006 the Christ for all Nations (CfaN) team traveled to Sudan … In Juba, Sudan the team conducted a crusade and fire conference. The response was amazing with over 243,532 people completing a decision card for salvation. The effort required to get to Juba by the technical team was nothing short of heroic. A 1500 kilometer journey over rough roads, and bridges barely able to hold the weight of the huge trucks.

This is probably the first time OFAC has gone after anyone for conducting a church service in a sanctioned country.

Of course, you have to scratch your head to figure out how an overland trip by a German evangelist to a remote area of Sudan to preach violates any of the necessary elements of a violation set forth in the Sudanese Sanctions Regulations. Under Section 538.507, the re-export by non-U.S. persons subject to license requirement under the EAR with less than 10 percent U.S. content and EAR99 items is not prohibited by the regulations. All the goods here came to Sudan by road from other parts of Africa which makes one wonder which of these goods, if any, met these requirements.

And regardless of one’s belief about the efficacy of the services provided at a religious rally, these hardly seem to be “services” in any traditional sense. And even if they are, what regulatory policy is furthered by defining them as such? Does a religious rally in Juba benefit the Sudan-regime in any way that is contrary to the foreign policy interests of the United States?

No fine was imposed by OFAC based on “the licensable, non-commercial nature of the conduct and the non-profit nature of the violator on the other hand.” But is anyone else troubled by the notion that OFAC should be licensing religious services in foreign countries?

KLM was fined $5,336.26 in connection with two cargo shipments it carried between KLM’s cargo facilities at O’Hare Airport in Chicago and the Khartoum International Airport. One shipment consisted of oil field equipment and the other contained hydraulic hoses. The offending shipments were not voluntarily disclosed to OFAC.M

OFAC’s initial nastygram to KLM (or “Prepenalty Notice” in OFAC-speak) proposed a $6,277.95 penalty. KLM’s reply admitted that its compliance program didn’t mention embargoed destinations but sought clemency from OFAC on the grounds that it had now circulated a notice to all U.S. operations reminding them about “bookings that cannot be accepted.” That delayed stab at compliance, however, did net KLM a savings of $941.69 or about 15% of the originally proposed penalty.

What is interesting here is that it now appears that KLM has circulated a bulletin to all of it’s cargo operations instructing them not to take any packages to Sudan or other embargoed destinations. That, of course, is an excessive, but understandable, response to the OFAC penalty proceeding. Yet, as we all know, not all cargo to Sudan is prohibited. A box of books would be fine under the information exemption. But KLM doesn’t want to have to inspect cargo and determine whether an export license is or isn’t required. And who can blame them?

Yes, yes, KLM broke the rules here, and it’s hard to muster up an abundance of sympathy for a carrier whose compliance program didn’t even mention that whole business of embargoed countries. Yet, yet, busting an airline for something like this (even if the fine is less than a first-class transatlantic ticket) will necessarily result in the airline doing exactly what it did here: overreact. This will make it difficult for shippers to send perfectly legal cargo to the country, violating the spirit, if not the letter, of the Berman Amendment, which established the exception for informational materials.

If OFAC needed a couple of whipping boys here, the shippers were better targets. They, of course, knew what they are shipping and should have known it wasn’t exempt.

Yesterday, the Office of Foreign Assets Control (“OFAC”) released its monthly rundown of recent civil penalties. This month’s winner of the coveted highest penalty award goes to Hilton International, a subsidiary of Hilton Worldwide, which agreed to pay $735,407 to OFAC in connection with the chain’s operation of two Hilton hotels in Sudan between June 2002 and February 2006. The alleged violation was self-disclosed by Hilton International in connection with due diligence conducted as part of Hilton’s acquisition, on February 23, 2006, of Hilton Group plc, a British company which, prior to the acquisition, owned and operated all Hilton hotels and resorts outside the United States.

After the disclosure, OFAC alleged that Hilton International had committed 142 violations of the Sudanese Sanctions Regulations. Because Hilton waived the 5-year statute of limitations, the applicable penalty was $11,000 per violation (as opposed to the higher penalty of $250,000 per violation which became effective on October 16, 2007). This meant a maximum penalty of $1,562,000, which OFAC agreed to reduce by slightly more than 50 percent.

The settlement here is about as smelly as, allegedly, the Khartoum Hilton itself. (More, later in this post, on these allegations in unfavorable reviews of the hotel.)

First, during the time period of the alleged violations, the Sudanese hotels were owned and operated by Hilton Group plc, a British company and, more importantly, not a “U.S. person” as defined by the section 538.515 of the Sudanese Sanctions Regulations. Only U.S. persons are subject to the prohibitions of the Sudanese Sanctions Regulations, most notably the prohibition of section 538.205 which forbids the export of goods, technology or services by U.S. persons to Sudan. If Hilton continued to operate the hotels in Sudan after the acquisition in February 2006 of Hilton Group plc, then section 538.205 would apply. But that’s not what is alleged here. There must be something else going on here that isn’t described in the OFAC release to explain why Hilton would agree to such a large fine in this situation.

Even if a violation occurred because of the operation of the hotels by Hilton Group plc, one can only wonder as to how OFAC concocted 142 violations exactly. Since the charges cover a period of approximately three years and 8 months, that’s one violation for each 6.4 days of operation of each hotel. Where did that come from? Why not find a separate violation for each month or year of operation? Heck, why not go for broke and allege that each minute of operation was a separate violation? Although the hotels were alleged to be miserable flea-traps, it’s doubtful that the hotels only had 142 customers or nights of occupancy during the relevant period, so that can’t be the basis for an allegation of exactly 142 violations. Given that the International Emergency Economic Powers Act, which establishes the applicable penalty, doesn’t provide guidance on how to calculate the number of violations here, it seems hard to justify an allegation of any more than two violations, one for each of the Hilton Hotels in Sudan.

On a lighter note, while researching this post I ran across some customer reviews of the Khartoum Hilton which were more than a little harsh and described the hotel as, variously, mosquito-infested, dirty, shabby, run-down, smelly and “grooty,” whatever that is. One highly amusing favorable review could only have been left by the hotel itself:

Hilton Hotel Khartoum is one of the best hotel’s location some gests can get board according to the government regulation and the Legislations , this hotel is good for hunny moons quiet better visit Sudan between Dec-March . for better outdoor activities clean . people are super nice limeted female workers due to culture but guys deliver outstanding services . all nice and Ibelieve its getting better .no hilton has location better than that arround the globe

I don’t know about you, but I’m packing my bags for Khartoum and checking into the Hilton for an extended stay.

The cause of celebration by the Google Earthers is the recent announcement by the Office of Foreign Assets Control that permits downloads in Sudan and Iran of certain free Internet related software. However, I think the Earthers have donned their party hats a little bit too soon because that general license doesn’t appear to cover programs like Google Earth. That license is limited to

software incident to the exchange of personal communications over the Internet, such as instant messaging, chat and e-mail, social networking, sharing of photos and movies, web browsing, and blogging.

Although there are aspects of Google Earth that permit users to share certain photographs, that is far from the principal function of the program, which is to provide detailed information on various locations around the world based on satellite photos of those locations. That’s not quite the same thing as instant messaging or blogging software covered by the newly announced general license.

certain services and software incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging.

To be eligible the services must be offered free of charge and any software must be EAR99, not subject to the EAR, or mass market software classified under ECCN 5D992. Also, the exporter must not have any reason to believe that the services or software is destined to be used by the government of Sudan or Iran. A similar license was announced for Cuba but it only covered services since BIS controls exports of software to Cuba. Any bets on how long it will take for BIS to act to permit these software exports to Cuba? BIS action will also be necessary for similar exports to Syria.

And here is what hasn’t changed at OFAC. Today OFAC announced that it spent untold tens of thousands of taxpayer dollars to fine some poor schlub $575 for buying Cuban cigars over the Internet. I have to assume that this single cigar purchase will provide funds to the current Cuban government that will keep it in power for about five minutes longer than otherwise would have been the case thereby justifying all the government expense involved in imposing the fine.

Under the Sudanese Sanctions Regulations, lobbying services can only be provided to the Government of Sudan under a license granted by the Office of Foreign Assets Control. The odd thing about this case is that Cabelly had applied for and obtained a license to provide such lobbying services. The violations alleged by the indictment related to services performed before and after the period of validity of the license as well as services performed during the validity of the license that allegedly exceeded the scope of the license.

In May 2005, Cabelly applied for an OFAC license seeking permission to provide “strategic counsel, public relations and government relations” services to Sudan. The application specifically noted that Cabelly would not be providing advice on trade and investment promotion “which is not appropriate at this time.” On July 11, 2005, OFAC issued the license which specifically stated that it did not authorize activities which involve “commercial projects in Sudan or any other activities which would benefit Sudan or persons located therein.”

The indictment’s allegation of pre-license activities seems to find its sole support in an email sent by Cabelly to Sudan two days after the license was issued. That email asked Sudan for a payment of $70,000 to compensate him for the past four months of work provided to the Government It seems reasonable to assume that Cabelly may have erroneously believed that a license was necessary only to cover payment for his services. This would explain why Cabelly waited until after the license was granted to discuss the compensation issue.

The activities during the validity of the license appear to involve, among other things, Cabelly’s assistance to various investors and companies interested in investing in oil exploration and production in Sudan. One of these companies, identified in the indictment only as “French Oil Company — Soudan” is thought to be, and likely was, French oil giant Total SA.

Once Cabelly’s activities in Sudan became known, he came under pressure to stop providing services to Sudan. A 2006 Washington Post article details leaflets that were stapled to trees in Cabelly’s Capitol Hill neighborhood taking him to task for his representation. Representative Frank Wolf got out his pitchfork and torch and joined the crowd of protestors, going so far as to write Condi Rice to complain about Cabelly being given the license to represent Sudan. Wolf was apparently unaware that the license came from OFAC, which is part of the Treasury Department, and not from the State Department. (Just because someone makes laws doesn’t mean that he actually has to understand them.)

In February 2007, Cabelly informed OFAC that his contract with Sudan was over and requested that his OFAC license be terminated. Even so, the indictment alleges that Cabelly continued to provide services to the Government of Sudan and to companies doing business in Sudan, including activities to assist Sudan Airways to acquire an aircraft from a “Bahrain aircraft acquisition company.”

Interestingly, not one word of this was in Gration’s prepared remarks which had been submitted in advance to the Committee. The remarks about genocide in Sudan and the call for lifting the current sanctions appeared to have been delivered off-the-cuff. This probably reflects the internal debate at the White House about the Sudan Sanctions. Ambassador Rice was said, according to the same story in the Monitor, to have become furious over Gration’s remarks earlier this month about the “remnants of genocide” in Sudan.